Professor’s Comments May 12, 2020
Posted by OMS at May 12th, 2020
The markets were mixed yesterday. After an initial decline predicted by Friday’s low volume rally, the Dow rallied intraday and then fell into the close. Once again, the volume dried up on the rally, meaning the Dow could be getting close to a top. It might not exceed the 29 April high of 24,765.
The Dow finished with a loss of 109 points, closing at 24,221. The NASDAQ was up 71 points while the SPX finished up fractionally (+0.52 points). Volume on the NYSE was moderate, coming in at 94 percent of its 10-day moving average. There were 34 new highs and 14 new lows.
The most interesting thing I saw yesterday was what occurred with sentiment in the final hour of trading. Back on 19 February, the day the S&P topped, the Put/Call ratio had its lowest reading in years of 0.55 percent. A reading like this suggests that investors believe the market is going to the moon, which of course never happens. The reading was EXTREMELY Bearish! So yesterday, just before the close, the P/C ration fell to 0.65 percent, it’s lowest reading since the 19 February number. Once again, investors seem to believe that the retracement rally will go on forever. Hmmm? It’s not gonna happen.
So, seeing this EXTREMELY low P/C ratio made me take a step back and look for other things that might prevent the Dow from reaching the 25,000 level, which is still my primary scenario for the completion of Major Wave B up. One of the things I saw was a small developing Head &Shoulders Pattern on the Dow. As most of you know, H&S Patterns are reversal patterns, so seeing one develop now is something that needs to be watched closely. The ‘Head’ for this pattern is the 29 April high of 24, 765. The ‘Left Shoulder is the 4 May low of 23,361, which puts the neckline near the 23,350 level. In other words, IF the Dow declines below the 23,350 level now, it would be EXTREMELY negative. It would be cause for me to re-assess the Bullish scenario I have on the Board. Heck, just seeing the pattern develop along with the Bearish P/C ratio has caused me to lower the odds for a rally above 24,765 to 50-50 at best. And you know how I feel about even money bets. (I don’t do them).
Bottom Line: We need to be cautious now.
Students should also note how narrow the Bollinger Bands on the Dow have become. If the market starts to move lower now, we could start ‘squeezing the tube of toothpaste’.
The Market Timing Indicators for the Major Indexes remain Positive. If they turn Negative during the next few days, you might want to take appropriate action. Remember, all during mid-to late January, I warned about the large Ending Diagonal that was forming for the past year. I talked about how it had completed five waves up and could begin to decline at any time. I gave you a target for the decline (21,700). So now I’m warning my students again. The current retracement rally has formed another smaller Ending Diagonal pattern…and is now developing a small H&S reversal pattern. Once the final waves of these patterns complete, the target for the next Major Wave down is 18,213 or lower…. possibly much lower. So, protect yourself!
The Dean’s List and The Tide remain Positive.
The Sector Ratio weakened to 11-13 Negative after Monday’s session. This was a pretty big change from the positive reading of 19-5 we had going into yesterday’s session. So, the sectors are starting to weaken, another sign that we need to be cautious.
The top 5 strongest sectors were Material (includes gold) Retail, Cap Goods, Computers and Semiconductors. So, the tech sectors are still on the Strong List, a positive sign. If they begin to drop off the Strong List, it would be a good indication that it’s time to exit the long side of the market. Banks and Financials continue to lead the Weak List, followed by Transportation, Insurance and Autos. With the St. Louis Fed saying that unemployment could reach 32 percent in Q2 and the possibility of 47 Million people being laid off because of the Coronavirus, the economy slowing to a crawl. There’s not a lot of demand for money. People have stopped buying things, so the ‘things’ and ‘people’ don’t have to be moved, and for most of us, the only time the car leaves the garage is to buy food. At my current rate of driving, I won’t have to replace my car for years! Last week I even got a $54 rebate on my car insurance. When was the last time this happened? Never! Anyhow, If the market starts to head down, these are the sectors that will lead the way lower. Especially the Banks and trannies. I still believe they’re going to get clobbered, even from their current low levels. This is not the time to be thinking of these guys are ‘bargains. They’re not. The patterns suggest they could go a lot lower!
The Model continues to hold 40 shares of UCO, 600 shares of TBT, and 500 shares of GOLD with a cash balance of $76,147. The Model is waiting for the current rally to complete before re-establishing positions in inverse index ETFs. This re-buying could start as early as today.
Gold and the miners fell yesterday remaining within their sideways triangle for wave 4. The 2-period RSI on GLD came in with an oversold reading of 28.04 yesterday with a VTI showing NO Trend. So, gold should begin to rally soon. If GLD begins to break out of its triangle, causing the Timing Indicators to turn Positive, I will begin to hold and Scalp Trade gold and mining stocks to the long side. My target for gold (the metal) remains above the 1,900 level, with 1,950 to 2,000 possible. Gold and the miners will be an area of focus for me today. I believe the developing wave 4 triangle and its oversold conditions make them one of the best bets on the Board. Same for silver. BTW, my current wave 3 up target for silver (the metal) is near the 23-24 level. The chart suggests this target could be reached within the next 2-3 months.
Bonds are also in focus as they appear to have completed their Wave B retracement rally and are now gaining downside momentum. TMF lost 1.02 points yesterday and looks to have a lot more downside to go. The 2-period RSI on TMF is moderately oversold, with the VTI showing No Trend, so IF Bonds rally today the Model will consider adding to its 600 shares of TBT, but only if the ETF pulls back.
That’s what I’m doing,
h
The Model Portfolio is being shown for educational purposed only. The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio. Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.
Market Signals for
05-12-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 05 May 2020 |
NASDAQ | POS | 05 May 2020 |
GOLD | NEU | 11 May 2020 |
U.S. DOLLAR | POS | 05 May 2020 |
BONDS | NEG | 30 Apr 2020 |
CRUDE OIL | NEG | 24 Feb 2020 |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments